“Intoxicated Investors” Slammed Corporate Bonds

What caused corporate bond yields to balloon as the financial crisis deepened in 2007 and 2008?

This article cites Associate Professor Ayako Yasuda’s study “The Behavior of Intoxicated Investors: The Role of Institutional Investors in Propagating the Crisis of 2007-2008,” which found that corporate bonds held by investors that had high exposures to securitized bonds experienced greater price declines in late 2007 and 2008.

Using a novel data of institutional investors’ bond holdings, Associate Professor Ayako Yasuda and co-authors Alberto Manconi from Tilburg University and Massimo Massa from INSEAD examine a transmission of the crisis of 2007-08 from the securitized bond market to the corporate bond market via joint ownership of these bonds by investors.

The authors posit that, ceteris paribus, corporate bonds held by investors with high exposure to securitized bonds and liquidity needs experience greater selling pressure and price declines (yield increases) at the onset of the crisis.